Carbon Tax Over-Rated

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Yves here. Way back at the time of the 2007 IPCC report, the Financial Times, in an editorial, touted the notion of putting a price on carbon. Even conservative economics sites like Marginal Revolution were touting the idea of “Pigouvian” carbon taxes. Even then, we pointed out that this sort of tax would be very regressive and would need to be accompanied by tax changes and perhaps even income supplements for the poor. Needless to say, it wasn’t hard to imagine how likely that would be in the US.

You can imagine how airy-fairy the idea of redistributing carbon tax receipts to poor countries that would be hit particularly hard by high energy costs. Aside from the example of “help” in the form of the tender ministrations of the IMF, Nicholas Shaxson documented in his book Treasure Islands that poor countries in Africa are couterintuitively capital exporters, thanks to multinational transfer pricing games and looting by the wealthy.

By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Jomo Kwame Sundaram’s website

Addressing global warming requires cutting carbon emissions by almost half by 2030! For the Intergovernmental Panel on Climate Change, emissions must fall by 45% below 2010 levels by 2030 to limit warming to 1.5°C, instead of the 2.7°C now expected.

Instead, countries are mainly under pressure to commit to ‘net-zero’ carbon (dioxide, CO2) emissions by 2050 under that deal. Meanwhile, global carbon emissions – now already close to pre-pandemic levels – are rising rapidly despite higher fossil fuel prices.

Emissions from burning coal and gas are already greater now than in 2019. Global oil use is expected to rise as transport recovers from pandemic restrictions. In short, carbon emissions are far from trending towards net-zero by 2050.

False Promise

At the annual climate meetings in Glasgow, carbon pricing is being touted as the main means to cut CO2 and other greenhouse gas (GHG) emissions. The European Union President urged, “Put a price on carbon”, while Canadian Prime Minister Justin Trudeau advocates a global minimum carbon tax.

Businesses are also rallying behind one-size-fits-all CO2 pricing, claiming it is “effective and fair”. But there is little discussion of how revenues thus raised should be distributed among countries, let alone to support poorer countries’ adaptation and mitigation efforts.

Carbon pricing supposedly penalizes CO2 emitters for economic losses due to global warming. The public bears the costs of global warming, e.g., damage due to rising sea levels, extreme weather events, changing rainfall, droughts or higher health care and other expenses.

But there is little effort at or evidence of compensation to those adversely affected. Therefore, poorer countries are understandably sceptical, especially as rich countries have failed to fulfil their promise of US$100bn yearly climate finance support.

The CO2 price market solution is said to be “the most powerful tool” in the climate policy arsenal. It claims to deter and thus reduce GHG emissions, while incentivizing investment shifts from fossil-fuel burning to cleaner energy generating technologies.

No Silver Bullet

Carbon pricing’s actual impact has, in fact, been marginal – only reducing emissions by under 2% yearly. Such impacts remain small as ‘emitters hardly pay’. Most remain undeterred, still relying on energy from fossil fuel combustion. Also, many easily pass on the carbon tax burden to others whose spending is not price sensitive enough.

Only 22% of GHGs produced globally are subject to carbon pricing, averaging only US$3/ton! Hence, such price incentives alone cannot significantly discourage high GHG emissions, or greatly accelerate widespread use of low-carbon technologies.

Powerful fossil-fuel corporate interests have made sure that carbon prices are not high enough to force users to switch energy sources. Thus, existing CO2 pricing policies are “modest and less ambitious” than they could and should be. Meanwhile, several factors have undermined carbon taxation’s ability to speed up ‘decarbonization’.

First, carbon taxes have never actually provided much climate finance. Second, CO2 taxes misrepresent climate change as due to ‘market failure’, not as a fundamental systemic problem. Third, it seeks efficiency, not efficacy! Thus, it does not treat global warming as an urgent threat.

Fourth, market signals from carbon taxation seek to ‘optimize’ the status quo, rather than to transform systems responsible for global warming. Fifth, it offers a deceptively simplistic ‘universal’ solution, rather than a policy approach sensitive to circumstances. Sixth, it ignores political realities, especially differences in key stakeholders’ power and influence.

Unfair to Poor

Even if introduced gradually, the flat carbon tax will burden poorer countries more. Worse, carbon pricing is regressive, hurting the poor more. Thus, the burden of CO2 taxes is heavier on average consumers in poor countries than on poor consumers in ‘average’ countries.

A UN survey showed a seemingly fair, uniform global carbon tax would burden – as a share of GDP – developing countries much more than developed countries. Thus, although per capita emissions in poorer countries are far less than in rich ones, a flat CO2 tax burdens developing countries much more.

Also, a standard carbon tax burdens low-income groups more, by raising not only energy costs directly, but also those of all goods and services requiring energy use. With this seemingly fair, one-size-fits-all tax, low income households and countries pay much more relatively.

Analytically, such distributional effects can be avoided by differentiated pricing, e.g., by increasing prices to reflect the amount of energy used. Also, compensatory mechanisms – such as subsidies or cash transfers to low-income groups – can help.

But these are administratively difficult, particularly for poor countries, with limited taxation and social assistance systems. Furthermore, effectively targeting vulnerable populations is hugely problematic in practice.

Mission Impossible?

Selective investment and technology promotion policies are much more effective in encouraging clean energy and reducing GHG emissions. Huge investments in solar, hydro and wind energy as well as public transport are required, typically involving high initial costs and low returns. Hence, public investment often has to lead.

But most developing countries lack the fiscal capacity for such large public investment programmes. Large increases in compensatory financing, official development assistance and concessional lending are urgently needed, but have not been forthcoming despite much talk.

Climate finance initiatives generally need to improve incentives for mitigation, while funding much more climate adaptation in developing countries. Potentially, a CO2 tax could yield significantly more resources to cover such international funding requirements, but this requires appropriate redistributive measures which have never been seriously negotiated.

Carbon Taxes Can Help

Even without an ostensibly market-determined CO2 price, taxing GHG emissions would make renewable energy more price competitive. The UN advocated a ‘global green new deal’ in response to the 2008-2009 global financial crisis. It noted a US$50/ton tax would make more renewables commercially competitive, besides mobilizing US$500bn annually for climate finance.

A mid-2021 International Monetary Fund (IMF) staff note has proposed an international carbon price floor. This would “jump-start” emissions reductions by requiring G20 governments to enforce minimum carbon prices. Involving the largest emitting countries would be very consequential while bypassing collective action difficulties among the 195 UN Member States.

The scheme could be pragmatically designed to be more equitable, and for all types of GHGs, not just CO2 emissions. But even a global carbon price of US$75/ton would only cut enough emissions to keep global warming below 2°C – not the needed 1.5°C, the Paris Agreement goal!

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  1. PlutoniumKun

    I can remember way back to the early 1990’s when The Economist magazine did a detailed special report on climate change calling for carbon taxes. I remember thinking at the time that if The Economist was on board, there must surely be action soon. Needless to say, nothing happened. The very low energy prices of the 1990’s undoubtedly set us on a very bad path – arguably even a small carbon tax back then could have been highly effective.

    The key point of course is that businesses don’t make major capital investments on the basis of existing prices, but on their expectations over the next decade or more. A carbon tax can do this, but one full of loopholes won’t make any impact and will in any event be highly regressive. An expectation of much stricter regulation is likely to be far more effective. The construction and aviation industry is now making the right noises about zero emissions, but not because of a fear of costs (although uncertainty over fossil fuel prices is undoubtedly an element), but because they want to get ahead of the game in anticipation of regulatory changes. With construction as an example, incorporating low carbon requirements into standards for steel or concrete would be far more effective (and cheaper) than a carbon tax.

    1. fjallstrom

      “I will tell you there is not an appetite for a carbon tax. It is a non-starter. Nobody is going to propose a tax on all Americans. And the cynical side of me says yeah we kind of know that. But it gives us a talking point. We can say well what is ExxonMobil for? Well we’re for a carbon tax.

      “Carbon tax is not gonna happen. I have always said, and I’ve worked on climate change issues for twenty years. There’s a lot of talk around it and the bottom line is it’s going to take political courage, political will in order to get something done. And that just doesn’t exist in politics. It just doesn’t.

      – Keith McCoy, senior ExxonMobil lobbyist on Capitol Hill, caught on tape by Greenpeace posing as head-hunters and published by Channel 4 UK

      I wouldn’t be surprised if eventually we learn that the Economist pushed carbon taxes in the 90ies because they were hooked into the same networks as Exxon and wanted to promote a non-solution as a fake solution.

      Within a country carbon taxes can absolutely play a role, but if we are looking at the world I think we need to ban coal, oil and gas extraction. Leave it in the ground.

      Leaving it in the ground is the end goal of any successfull effort to end demand anyway, and is a more direct route. If one wants a market mechanism, have the companies bid on yearly licenses to extract and decrease their amount every year in the amounts needed to stay within the limits set by the IPCC. The licenses can fund international inspectors – Hans Blix is still alive, and even though he is close to a century he can probably give tips on how to do it – and also fund wind power for the poorest countries.

  2. Gc54

    The En-roads simulator has an explicit globally averaged Carbon Tax setting that you can dial up at whatever rate and start time you want. You can explore the expected delta-T by 2100, unfortunately not beyond. It’s an effective teaching tool that encourages participation and experimentation.

  3. Jason

    Isn’t this flogging a dead horse? Nobody believes that a global carbon tax is possible. There’s no global tax authority anyway. Individual countries may want to use carbon taxing or a tight cap and trade with caps that are tied to Paris Agreement targets as part of their overall strategy. But nobody believes in singular solutions anymore.

    1. Yves Smith Post author

      Unfortunately, this post indicates this idea is being bruited about at COP26….which to your point, suggests that it’s another diversion.

    2. Matthew G. Saroff

      You can structure a national carbon tax like a value added tax (VAT), and make it refundable on export, so the final consumer is responsible.

      The way a VAT works, if Germany builds a car that costs €30,000.00, the VAT assessed in Germany is 19%, so the VAT assessed is €5,700.00,

      If it is exported to France, (VAT 20%), the €5,700.00 is rebated, and a French VAT of €6,000.00.

      This has been done for years, and is in accordance with global trade rules.

      Compare this to carbon credits, where corrupt organizations like the Nature Conservancy sell credits not to cut down trees from places that are already committed to never cut down those trees.

      As to cap and trade, there is no way not to disadvantage exports, and you generate enormous parasitic costs as the financial industry speculates with things like “Carbon Default Swaps” and “Synthetic Carbon Debt Obligations,” (Yeah, I played with the acronyms) while encouraging a race to the bottom, so that predatory exporters are not allowed to game the system.

      As to the impact on the poor, you make carbon taxes refundable on a uniform basis to your residents, or only your citizens if you are a natavist xenophobe, which means that the rich pay more and the poor and middle class get a rebate larger than the taxes paid. (By 2030, the richest 1% are on track to create 16% of carbon emissions)

      This has the advantage of placing the carbon tax on consumption, which is dominated by the developed world, rather than production, where the lesser developed nations (LDCs) have a more significant role.

      As to the poorer countries, they generate more carbon per unit of GDP, so they take a greater hit on exports, but the cost delta of building new energy infrastructure, which they need, energy efficient from the start is less than retrofitting existing infrastructure, which is what needs to be done in the developed world.

      Then again, they will suffer the most dire consequences of anthropogenic climate change.

      The conceit of current climate negotiations is that the poorer nations must be completely, or nearly completely, subsidized to restrict carbon.

      If you really want to reduce the burden on LDCs, you need to loosen IP restrictions, which function as colonial international economic trade regime. (Just look at what’s going on with Covid vaccines)

      If an LDC does not levy a carbon tax on its own consumption, but one is assessed on import by a more developed nation, you will still get most of the carbon reductions that you need.

  4. solarjay

    To add to the COP26 part. Here in the US, in regards to solar, we have the existing tariffs on chinese solar panels,( 25% about) now there is the WRO which is again against china. Now I hear from my friends deeper in the know than me that there is a new push from unnamed “US” solar manufacturers of which there are basically none of any size, to put new tariffs on asian solar modules which is basically the rest of the solar manufacturing world.
    There have been a few GW worth of solar confiscated so far that I know of, I don’t know what actually happens to them, maybe they go back to china? and more all the time. This winter if the additional tariffs are added and the WRO continues, solar will be in extremely short supply and prices which are already going up a lot will go up a lot more.

    All of these tariffs etc were to in principle to get the US to manufacture more solar panels here. That hasn’t happened at all. Pretty much all the investment in solar has been in for installations not production. Which to me says that no one has any confidence that spending billions of dollars to build a plant will pay off. And to build large scale solar you need, very specific low iron glass, aluminum for the frames, and specific plastics for the glue and back sheet again all of which we don’t make here.
    There is at least one poly silicon mine, in Moses lake Washington which is shut down due to not being able to sell its product to china because of the chinese putting tariffs onto our poly silicon because we put tariffs on their modules/parts.

    But you know this is all helping us to reduce our carbon footprint, Way to go Joe.

  5. chuck roast

    Economists, being trapped in their bourgeois paradigm, are simply no help in this world-wide emergency. I used to think that a Pigouvian solution was possible, and a carbon-tax was far preferable to carbon trading. I also thought that a work-around to the regressive nature of carbon taxes was possible…even with the debacle at Kyoto marking the beginning of the end of times. Now I am under no such illusions. Ask the gilets jaunes what they think of carbon taxes. Their actions may have been the first shots fired in coming environmental class wars.

    Economists threw political economy over the transom a hundred years ago when they sold out to the ruling class. They have no answers because they continue to ask the wrong questions. Elevators simply don’t work in a burning building. Until they begin addressing equitable solutions to de-growth they are doomed and we are doomed along with them. It’s about distribution and not aggregation…duh!

  6. T_Reg

    I think a global tax is nigh on impossible, but I think a nationwide carbon tax is feasible. However, it wouldn’t last a second without complete redistribution in equal portions to the populace. (It’s been proposed in some form in Congress, and called “dividends”). That provides both a disincentive to consume, and an incentive to conserve. If you use the average amount, there’s no effect on you (other than corporations jacking up their prices far beyond their increased costs). Over that, and you pay, under that, and you get paid.

    It would likely take some variation of a revolution to bring it about, but the effects on the general population could lead to support for the probably necessary constant increases.

    Notes: tax at the source, distribute to individuals. Tax imports and refund exports from those proceeds.

    1. drumlin woodchuckles

      James Hanson first proposed distributing the entire fossil carbon FeeTax back to citizens as a Dividend.
      And his proposal was cleanly designed and cleanly intended to exterminate the fossil carbon industry from existence over time.

      Would any Congressionally designed FeeTax-Dividend system be so cleanly designed or cleanly applied to exterminate the fossil carbon industry from existence over time?

      Here is Doctor James Hansen writing about it his own self in his own words.

      And if America adopted this, we would have to immediately defect from Free Trade and reprotectionise our country to keep all our carbon dumping trading enemies from carbon dump flooding our economy with their fossil carbon aggression carbon-dumping based production. if we didn’t do that, our attempt to apply the Hansen Plan would be destroyed within a few years, drowned beneath a surging flood of carbon dumping fossil-based production from a hateful spiteful Outside World.

      1. T_Reg

        I think the imposition of the tax at the border (and it’s refund for exports) could make trade carbon-tax-neutral; can’t economically dump your carbon-hog product on the U.S. if you have to pay the same tax. However, management of the process would require a bureaucracy bigger than the IRS, dealing with the complex problem of assessing how much carbon was consumed by creating (and, for import, shipping) that product, which is not an issue for entirely internal transactions with the tax applied at the origin of the carbon.

        Nice to learn that my thinking lines up, even a little, with Dr. Hansen, for whom I have much respect.

        1. drumlin woodchuckles

          Whereas a simple hard-ban against even the slightest jot or tittle of product crossing the US border from a country that doesn’t adopt the same exact Full Metal Hansen FeeTax Dividend as the US . . . . if the US were to adopt it . . . . would not need a huge bureaucracy to work out and police.

          And a total repudiation of every free trade agreement, membership, etc. would leave the US legally free to impose that hard ban, if the US were to adopt the Hansen Plan.

  7. Darius

    A carbon tax isn’t a panacea. But it should be part of a suite of measures. One way to address the inequity in the US would be a bottom tax bracket that pays no income tax. Impose steeply graduated income taxes on the top 10 percent.

  8. Susan the other

    For the climate, profit-making monopolies are a dangerous thing. It does seem pretty counterintuitive for the Saudis to flood the market to keep the price down. They’ve been able to do that because their oil is very accessible and abundant. But there’s a problem somewhere because when they went to do an IPO nobody trusted their accounting. Do they really have that much oil? Should we invest for our retirement – and then come to find out that the wells are going dry fast? Then there is the hell-hole in the eastern Mediterranean where nations are being turned to rubble over off-shore natural gas “rights.” It is a resource grab and it’s all based on long term profits. And apparently, with oil/gas wells, that’s not always easy to calculate. Big oil has been going at an almost frantic pace trying to find and claim new wells. If all this is profit driven, then the oil must be bought and sold. If it is not profit driven then its use isn’t based on the market. It is based on best uses of a limited resource in a polluted world. That could be far easier to agree on. As well as the problem with methane. Controlling it is a cost too high to burden the oil companies with, apparently. But if the whole oil/gas industry were nationalized/globalized (somehow) then even the excess pollution would be addressed. Because… taxing this mess is just piddle.

  9. Dave in Austin

    Taxing “carbon users” has always seemed to me to be an impossibility. But taxing carbon producers (coal miners and gas and oil producers) seems more promising because it isn’t really possible to hide the activity.

    Likewise, large international financial transfers seems to me to be a non-starter. But if the financial tax windfall were to be distributed within the producing country much of the opposition might evaporate. Combine that with a post-WTO agreement that any country that refuses to implement a carbon tax would simply have it tacked-on to the exports to especially first-world countries with the money then going to the consumers in the receiving country. Now that’s a real incentive.

    And a provision that the tax money went to all citizens (or families?) on a pro rata basis with international oversite to avoid the usual third-world cream-off for the insiders might meet an almost universal approval (except from the oligarchs).

    I think it would also be easier to sell limited international cash transfers if the money were to be used only to purchase and install clean energy devices- China would love that.

    By making these suggestions I’m trying to square the circle caused by the understandable unwillingness of first world countries to fund corrupt third world oligarchs, the need to give carbon producers a reason to participate (they keep most of the tax revenue), and a mechanism to recycle some of the revenue into renewable resources to be erected in poor countries without turning it into welfare payment.

    And a small portion of the money eould easily double of tripple the funding of the “blue sky” answers- fusion, hydrogen and how it is produced and stored, and small scale solar to hydrogen.

    A bit cynical, I know, but this is the best I can think of on how to create an international regime among the big carbon users (US, China, EU and India), the big carbon miners (US, Russia, Arabia and all the little mini-states that hit the geological jackpot), and the poor and-not-really-developing third world states who are perpetually looking for a handout to mask their failure to develop.

    1. drumlin woodchuckles

      America is also a big carbon miner as well as carbon user. So is China. So is India. And while Australia is not that big a carbon user, it is a big carbon miner. A big percent of Australia’s money comes from shoveling coal to sell to Satan.

  10. drumlin woodchuckles

    When mainstream spokesfolk talk about a “carbon tax”, I don’t think they are talking about James Hanson’s ” Full Metal FeeTax-Dividend” against fossil carbon at very first point of sale. If they are talking about a “minimum carbon tax” as described in this posted article, then of course it will have an effect as minimal as the size of the “minimum” carbon tax.

    Whereas the Full Metal Hanson FeeTax Dividend might have a large effect if implemented the way Hanson described it and applied for the overtly stated purpose that Hanson designed it. The potential regressiveness mentioned here . . . “Even if introduced gradually, the flat carbon tax will burden poorer countries more. Worse, carbon pricing is regressive, hurting the poor more. Thus, the burden of CO2 taxes is heavier on average consumers in poor countries than on poor consumers in ‘average’ countries.”
    . . . would be met within any particular country which applied Full Metal Hanson by the Dividend part of it.
    Just-barely-housed borderline poor people will spend a large percent of all their spending on fossil carbon, one way or another. Whereas Bill Gates will spend only a fraction of his overall spending on fossil carbon. But Gates will spend more actual money on fossil carbon than the borderline poor person will. And so Gates would spend more actual money on a FeeTax attached to the carbon. And Gates’s FeeTax will be pooled with Borderline Poor Person’s FeeTax and the FeeTax money will be equally divided between Bill Gates and Borderline Poor Person. The FeeTax Dividend going to Bill Gates would be derisory to Bill Gates, but the same size Dividend going back to Borderline Poor Person would be very significant to Borderline Poor Person. it would be enough for Borderline Poor Person to keep up with his unavoidable survival spending on fossil carbon.

    So how does James Hanson think the FeeTax would pressure downward the use of fossil carbon? He thinks that as the fossil carbon FeeTax keeps getting passed down the buy-sell-buy-sell chain for everything that contains or involves fossil carbon in itself or its manufacture, that the prices of fossil-carbon-tainted things will rise more than the prices of fossil-carbon NON-tainted things. And non-rich people will be price-pressured to spend their dividends on less-fossil-tainted lower priced things as against more-fossil-tainted higher priced things. Perhaps he is taking it on faith that it would really work this way.
    Perhaps the fossil-free thingmakers and thingdoers would raise their prices just as high as the fossil-tainted thingmakers and thingdoers have to. If so, that would be a failure of the concept.

    But if the concept “could” succeed? Then any country which adopted it would have to defect from the Free Trade system and re-protectionise itself so as to reclaim for itself the right to ban imports of everything from every country which fails to adopt the exact same Hanson system at the same exact Hanson rates. This would be necessary to protect the Hanson System countries from carbon dumping by their No Fee No Tax No Dividend No Hanson trading enemies.

  11. JeffC

    Forget the tax. It’s politically ridiculous, and there’d be no agreement on the level. Instead require oil and gas companies to physically extract and sequester as much carbon from the air as their product will put into it. Anything less severe is a tax on everyone else. A theft basically.

    1. drumlin woodchuckles

      In the real world, I don’t think the technology will ever exist for the coal, gas and oil companies to physically extract and sequester every bit of carbon dioxide their products are designed to emit when used.

      But if it did, then they should be free to pass the entire cost of doing so down the line to their customers at every step.

      About a tax on everyone else being a “theft” . . . . if it were legal how would it be a “theft”? Under the law?
      But the Hansen Plan isn’t designed to keep “thefting” tax money from everyone else over the long term. The Hansen Plan is designed to make coal, gas and oil so wildly expensive as to be too expensive for anyone to buy, therefore too expensive for any seller to sell. The long range purpose of the Hansen Plan tax would be to exterminate the coal, gas and oil industry from from the energy portfolio.

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